The Art of Gentrification

A key feature of the US property market is credit leverage, and one aspect I see not discussed a lot is that leverage is very unevenly (please note, I did NOT say "unequally") distributed. Property developers can access far more leverage than retail customers, and this is arguably a feature, not a bug.

This becomes an issue however, when the leverage prices out the long-time residents who want to stay, because the urban amenities are far more walkable and generally accessible than an equivalently-priced suburban location has access to. Property tax increases on these long-time residents over a period of 10-15 years of gentrification are very unforgiving. There is a legitimate concern that these long-time residents (many of whom are elderly or multi-generation households) are involuntarily pushed out by the increased property taxes, and are disproportionately able to capture the latent profit of selecting a desirable location far in advance. There are arguments to be made about disincentivizing really long-term delayed gratification and very high-density living arrangements for the multi-generational settings when these types of externalities to gentrification are dealt with. Knock-on effects can also be brought up, like the disincentives to establishment of large, multi-generational households to mitigate the adverse financial impact of early stage eldercare on lower economic families (that is, large, multi-generational households can more easily self-provision amongst family members early stage eldercare, leading to higher quality of life overall). On the other hand, you definitely want developers to continue urban development and densification for its generally-accepted benefits (on energy utilization if nothing else).

There are no good solutions to this dilemma, short of revamping credit leverage rules, which has its own set of thorny negative externalities. An interesting approach I saw operating first-hand in China in a third tier city was the developers of one high-rise complex offered to not only buy out the family's property (I think in China it was some right-of-use leased from the central government that was being purchased, and not the land itself), but as part of the buyout guarantee to sell enough apartment unit bedrooms to house the family at one-for-one replacement plus an additional separate two-bedroom apartment unit, all at a steep discount to what was offered to retail unit buyers, on top of subsidizing the temporary housing of the family in nearby leased apartments during the construction phase.

This was a very long time ago; I doubt very much this still happens in the China of today. It had the effect of gracefully transitioning the lower (relative to the new residents) socioeconomic family unit that did not want to vacate the land at first, give them access to the urban amenities they wanted to stay close to in the first place (and denser available amenities at that, as the area filled in around the high-rise after completion), kept the family together as no one had to split up for different commuting arrangements, and give them a unit to rent out for income to compensate for increasing property taxes and utility expenses in the future. If this took place in the US, it would also give them an extremely low basis to pay property taxes upon so the arrangement could be quite sustainable for the transitioned family even with sharply-increased property taxes (I'm not familiar with how property taxes work in China, so I don't know what happened property tax-wise in the situation I saw when I spoke with the developer and resident family's patriarch). While some might see this kind of offer as expensive to the developer, the developer had sufficient permitting to dramatically densify the same plot of land that the bought-out families were on such that it had only a very minor impact upon profitability, while earning PR points with the locals that spread good advertising he couldn't have bought even if he wanted, and avoiding any rancor over the development that typically arises from gentrification-displaced residents (the developer recognized he couldn't help the neighbor residents who were adversely affected by his development pushing up their shelter costs, but that was understandably out of his control).